Loan Protection Explained

When you are sold a loan or take out a loan from a large number of financial providers, you will probably be asked questions around protecting the loan.

This protection on a loan is called insurance, and you might hear reference to 'PPI'. This three letter acronym refers to "Payment Protection Insurance".

This is a form of insurance that will guarantee your payments in a large range of unfortunate circumstances that may affect you.

The classic case is illness - imagine you get ill and need to pay back your loan, but you are unable to work. In this case you will really struggle to meet loan payments. However, if you have insurance on the loan, then these things are covered.

PPI can offer a variety of things, but typical elements might include:

- Cover for your loan payments against accidents, involuntary unemployment, illness
- Payment of all loan if you die or are critically ill
- Help and advice offered if you encounter any situation that might endanger your loan repayments

Therefore, whether loan protection is right for you depends on how risk averse you are. If you are happy to take the risk that you have no protection, then the unsecured loan would seem most appropriate for you.

If you don't like risk and want to be protected against this eventuality, then it might be you decide to take PPI, which is usually sold as offering 'additional peace of mind' to whoever takes out the loan.

Now, if you don't want PPI you need to listen carefully whenever you take out a loan product, as many will be quite keen on getting you take PPI - the reason is that it is a big earner for the banks, and depending on the set-up it could be that the agent gets an extra commission for selling a loan with PPI e.g. in a call centre.

The key thing to remember is that peace of mind comes at a cost, and there will be an additional fee levied for PPI so if you decide to take out a loan with PPI then make sure you understand the exact costs.

Bear in mind also that those who take out PPI the majority never call on the policy and therefore are paying for those that unfortunately do need to make use of the protection offered.